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India Equity Research Reports, IPO and Stock News
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Strategy
INDIA
FCCBs – few opportunities in the middle of difficulty. We highlight the recent
activity in the Indian FCCB space on the back of redemption concerns magnified by the
recent Rupee depreciation. While high yields reflect the plausible threat of defaults and
restructuring for weaker issuers, we draw attention to some mispricing opportunities
within the FCCB space which are offering high yields along with lower risk due to
relatively sound financials.
Current scenario – weakness in the Rupee coincides with rising FCCB yields.
Amidst global concerns on European sovereign debt, the INR’s depreciation against the USD has
coincided with FCCB yields rising 5-7% since August. The extravagant issuance of foreign
convertibles in the 2006-08 period has become a cause for concern as more than ~70 FCCBs are
expected to mature in the next 12 months. Many of the issuers have seen frantic activity in terms
of board approvals for restructuring and refinancing of current outstanding obligations.
Considering that Indian stalwarts like ICICI, SBI and Reliance have seen CDS spreads shoot up
~200 bps since August, the possibility of raising cheap funds for the lower strata of corporate
India seems bleak.
India’s FCCB landscape – FCCBs worth US$6 bn maturing by April 2013
Indian corporate houses have raised debt of US$13.6 bn through the FCCB route since January
2006 with more than half of the issuance coming between January 2007 and January 2008
(US$7.5 bn). While companies in Materials and Industrials have issued the largest amount of
FCCBs, it is interesting to observe that smaller Information Technology companies raised ~US$1.8
bn in the same period. Going forward, outstanding FCCBs will stand at US$9.8 bn. Considering
the redemption premiums offered by most of these zero-coupon convertibles, the redemption
value is estimated to be around US$12.2 bn. With only 13 out of the 119 securities trading above
their conversion price and RBI regulatory prohibitions against reduction of conversion price, the
situation is definitely grim.
Scouring the FCCB space for opportunities
As the FCCB redemption worries take center stage, FCCBs for some of the prominent companies
are yielding 20-25% after diverging almost 10-15% from their year-to-date average. Solvency of
the universe of FCCB issuers is analyzed using quantitative screens including Altman z-scores,
leverage and interest coverage ratios. Using a generalized convertible bond (CB) valuation
methodology, the liquid securities in the FCCB space have been valued in order to identify the
magnitude of mispricing as well as the implied credit risk premium for some of the issuers. Within
our coverage universe, RCOM, JPA and Suzlon are yielding more than ~20%. Although highly
leveraged, debt-servicing capability for RCOM and JPA remains reasonable considering their
EBITDA-to-Interest paid ratio. As for those companies not covered by us currently, we would like
to highlight Everest Kanto Cylinders, Rolta India, Firstsource Solutions and Videocon Industries as
non-coverage companies with high yields and a relatively stronger ability to pay their liabilities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
INDIA
FCCBs – few opportunities in the middle of difficulty. We highlight the recent
activity in the Indian FCCB space on the back of redemption concerns magnified by the
recent Rupee depreciation. While high yields reflect the plausible threat of defaults and
restructuring for weaker issuers, we draw attention to some mispricing opportunities
within the FCCB space which are offering high yields along with lower risk due to
relatively sound financials.
Current scenario – weakness in the Rupee coincides with rising FCCB yields.
Amidst global concerns on European sovereign debt, the INR’s depreciation against the USD has
coincided with FCCB yields rising 5-7% since August. The extravagant issuance of foreign
convertibles in the 2006-08 period has become a cause for concern as more than ~70 FCCBs are
expected to mature in the next 12 months. Many of the issuers have seen frantic activity in terms
of board approvals for restructuring and refinancing of current outstanding obligations.
Considering that Indian stalwarts like ICICI, SBI and Reliance have seen CDS spreads shoot up
~200 bps since August, the possibility of raising cheap funds for the lower strata of corporate
India seems bleak.
India’s FCCB landscape – FCCBs worth US$6 bn maturing by April 2013
Indian corporate houses have raised debt of US$13.6 bn through the FCCB route since January
2006 with more than half of the issuance coming between January 2007 and January 2008
(US$7.5 bn). While companies in Materials and Industrials have issued the largest amount of
FCCBs, it is interesting to observe that smaller Information Technology companies raised ~US$1.8
bn in the same period. Going forward, outstanding FCCBs will stand at US$9.8 bn. Considering
the redemption premiums offered by most of these zero-coupon convertibles, the redemption
value is estimated to be around US$12.2 bn. With only 13 out of the 119 securities trading above
their conversion price and RBI regulatory prohibitions against reduction of conversion price, the
situation is definitely grim.
Scouring the FCCB space for opportunities
As the FCCB redemption worries take center stage, FCCBs for some of the prominent companies
are yielding 20-25% after diverging almost 10-15% from their year-to-date average. Solvency of
the universe of FCCB issuers is analyzed using quantitative screens including Altman z-scores,
leverage and interest coverage ratios. Using a generalized convertible bond (CB) valuation
methodology, the liquid securities in the FCCB space have been valued in order to identify the
magnitude of mispricing as well as the implied credit risk premium for some of the issuers. Within
our coverage universe, RCOM, JPA and Suzlon are yielding more than ~20%. Although highly
leveraged, debt-servicing capability for RCOM and JPA remains reasonable considering their
EBITDA-to-Interest paid ratio. As for those companies not covered by us currently, we would like
to highlight Everest Kanto Cylinders, Rolta India, Firstsource Solutions and Videocon Industries as
non-coverage companies with high yields and a relatively stronger ability to pay their liabilities.
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